In the cited case before the Swiss Federal High Court on 23 April 2014 (9C-832/2013), the year's salary in the pension plan rules corresponded to the projected AHV salary. However, salary elements such as commissions and bonuses were inadequately defined and hence, in the Court's view, not excluded from the insured salary for the purpose of non-mandatory pension provision. As the employer had for years failed to report the bonuses paid to one former employee (the plaintiff) to the pension fund, the unreported remuneration now has to be retroactively insured. This applies, of course to the other employees' remuneration too.
What is clear from both this case and the example below is that an inadequate definition of the insured salary can have considerable financial consequences. The firm in our example has 50 employees with bonuses averaging CHF 10,000 and retirement credits of on average 15% (employer's share 10%).
||Bonus (in CHF)
||Retirement credits Employer's share
||Additional employer's contribution p.a. (in CHF)
|Total: 50 employees
The additional employer's contribution of CHF 50,000 a year thus calculated must, then, often be corrected retroactively over several years, resulting in considerable financial consequences for the employer. No account is taken here for indirect costs or of the potential loss of trust on the part of the employees.
Correction? Yes, but how?
Dealing with incorrect payments for past insured periods can be complex depending on the situation. It can, of course, be the case that the insured salary was too high rather than too low. What really matters is how diligently an employer tries to ensure that employees don't demand retroactive corrections. It's obvious that success is dependent on professional handling.
Looking forward, the most straightforward and cost-neutral solution is to amend the rules as quickly as possible. Any such amendment must in any case be confirmed to the fund by the pension plan committee and then communicated to the employees. It can also be a good idea, depending on the structure of the remuneration system and following a comparison of the fund benefits against competitors, to consider a (partial) plan extension involving the insurance of such salary elements as bonuses and gratuities. This would of course have an impact on overall remuneration, although this can have its benefits in terms of "employer branding" and advantages in recruiting staff and fostering their loyalty.
It follows that the salary elements reported to the pension fund in practice must comply exactly with the insured salary as per the wording of the pension plan rules. In the interests of certainty, we advise you to check this as soon as possible. Get the compatibility of these two figures confirmed to you and find out about any solutions that may be required.
To make sure your pension plan rules keep you on the safe side, Towers Watson offers you a free analysis of the salary definition outlined in them. Send us an email with a copy of your current pension plan rules and a confirmation of the salary elements actually reported by the firm. We will send you a written response and advise on what action, if any, is needed.